TransUnion (TRU) Earnings Call Transcript & Summary

Welcome to the Growth Stock Conference, and thanks for joining us this morning. My name is Andrew Nicholas, and I'm the analyst here at William Blair covering the information services, HR technology and consulting sectors. Before I get started, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome the TransUnion team here today: CEO, Chris Cartwright; CFO, Todd Cello; and Head of IR, Aaron Hoffman. I'm going to go through a list of questions up here, fireside chat format. If we do have some time at the end, I'll happily solicit questions from the audience. But if not, we can certainly cover those in the breakout room following this presentation. So first, thank you very much to the team for joining us today. It is a generalist conference. I know there's probably a handful of investors here that are familiar with the story. But just to kind of level set to start, if you could just spend a little bit of time kind of talking about the business, the products that you offer, just a quick high-level overview of TransUnion before we get into some of the more specific questions and topical items with the current environment.

Okay. Great. Well, again, I'll start with something basic. So we're a global company. We operate in over 30 markets, and we're approaching roughly $4 billion in revenue. At the core, we are a credit reporting agency. And what that means is that all of the consumer lenders within a particular market in which we compete will furnish the existence of loans that they have with consumers, the terms and their performance. And based on that, we can generate reports. We can generate an analytic variety of different scores, and we can assist them with building models to understand marketplace dynamics, opportunities within different segments, origination risk, et cetera, right? And so that's the heart of the business. In the U.S., it's about 50% of revenue. And it's greater as you go across the remainder of the portfolio internationally. Over time, we had a progression of growth geographically, which got us into 30 different markets. Within those markets, we'll often serve multiple subverticals, right? So in Financial Services, we think of it not as FS in total but as mortgage lenders, consumer lenders, card lenders, auto lenders, et cetera. We also serve property and casualty insurance companies, the government, retail, e-commerce, a whole variety of verticals that need information and insights in order to make informed judgments about risks that they face, the risk of doing business, of extending credit, of collecting on a particular credit, et cetera, et cetera. Over time, we've grown the number of solutions that we provide geographically and across segments from these core repositories of credit information into public records information, which is used to investigate and understand relationships between people and assets and locations and the like. We've also progressed into broad analytic workflow tools, fraud mitigation capabilities for both off and online transactions, marketing, tools, a whole array, particularly based on recent acquisitions. And then we package up these various capabilities, and we offer it directly to consumers on both a subscription basis and, in some cases, a free basis.

That's perfect. Thanks for the primer there. I think what's most topical right now, as you might imagine, is kind of the current environment. So before we kind of get into each of the underlying businesses, I just -- if you can make a comment broadly on kind of the state of the consumer, what you're seeing in your business given you're probably in as good of a position as anyone to kind of see all this as it unfolds.

Yes. And our research team has done -- has released some recent studies that I think provide a more current picture of the consumer pulse. But as we said in our first quarter earnings, and I think that was confirmed by our competitors but also our clients, the lenders, consumers seem very strong in the first quarter. We know that during the pandemic, consumers were able to strengthen their balance sheets considerably, in part, by assistance that was provided by the U.S. government and governments in developed markets around the world. At the same time, it was difficult to spend money, and there was also forbearance on debt repayment. So emerging from the pandemic, the consumer's balance sheet was as strong as it's been in generations, right? And you saw a surge of economic activity over the course of '21 as all of this pent-up demand, combined with a strong foundational balance sheet, kind of surged back into the marketplace. And we saw strength through the beginning of the first quarter. It gave us the confidence to nudge our guidance upward a bit for the full year. We're not obviously in a position to talk about the second quarter just yet, but our research and consulting group recently did look at the performance of subprime consumers. And what we're seeing is that, well, first, savings rates have dropped considerably, and their balances are beginning to increase a little bit as well as the rate of delinquency, although by historical norms, it remains an extremely healthy picture. We are seeing a shift in, I'd say, consumer momentum in the second quarter. And we'll have to see how that develops over the course of the year. Obviously, there's lots of macro pressures from a variety of reasons. Supply chain constraints in the Far East, we're all familiar with it by now, a war in Europe for the first time. So a lot of sustained inflationary pressures that initially will impact the subprime consumer segment first and then, over time, can have a negative effect across economies globally. So we're just going to have to see how that situation develops to have a more informed longer-term perspective.

But traditionally, you would tend to see a slowdown in marketing activity amongst some of the issuers, maybe first. I think that's something that we've talked about in the past. And as far as I know, no early indications of that happening there, issuers still being relatively aggressive in terms of client acquisition.

Yes. Look, the first quarter, I said, was extremely strong, and it remains a robust market, right, in relative terms. When there is a slowdown because of some economic shock or a recession, you see it first in customer acquisition efforts, right, which fuels our batch credit marketing services. And you will also see in other parts of our marketing product line, right? Now when the economic picture in consumer health becomes a greater concern, the shifting does spend away from acquisition, but it shifts also to portfolio management and review and kind of risk assessment. And if the negatives on an economy or consumers persist for long enough, then you'll see more type of collections analytics, the value of delinquencies that will be sold off and also just analytics to develop the optimal way to pursue collections, typically through first-party efforts. So in good times, it's more expansionary, and the spending is more on acquisition. In less good times, it's more risk management and even collections. And so there's some offsets there.

And we can kind of look back to the first quarter. Within Financial Services, are there any particular areas or products that you've been seeing particularly outsized strength? And when you think about over the long term -- and maybe, Todd, you could speak to the long-term growth framework, what are the areas within Financial Services, in particular, do you expect to be outsized growth drivers?

Okay. I'll let you -- I know you've been on the road.

Be happy to do that. So we can start with the long-term guide that we provided at our Investor Day back in March this year. As Chris already alluded to, TransUnion's approaching $4 billion in revenue. The high end of our guide this year is about $3.9 million (sic) [ $3.9 billion ] and with EBITDA of about $1.4 billion, so $3.9 billion, $1.4 billion this year. The guide that we put out through 2025 at our Investor Day contemplates revenue of $5 billion by 2025, with adjusted EBITDA at about $2 billion plus, which then implies a 40% adjusted EBITDA margin. And we're also expecting $6 of EPS. And compared to what we're expecting this year, it's roughly about $4. So we see significant amount of growth ahead of us. Andrew, I know your question's specific to Financial Services, but you're asking me a big question. And it's bigger than Financial Services, what our growth expectations are as we look out to 2025. We did definitely have a tailwind throughout the pandemic with low interest rates, particularly in the U.S. We saw a surge in mortgage activity, particularly with refinance. Very cyclical business, not one that we put a lot of emphasis on because of how it ebbs and flows. So where we do focus our energies are just on the areas that are strategic imperatives for us. And with that being said, the core of TransUnion has always been credit. Obviously, as Chris articulated, at the beginning, that we've done a series of acquisitions over the last probably 6 months. I guess we'd say go back to December, where we've acquired capabilities that augment not just credit but also marketing and fraud capabilities that TransUnion quite honestly has always played in. But the markets evolved so significantly as the economy has gone so digital. So the assets that we've acquired, in particular with Neustar, Sontiq and Verisk Financial Services, they help with the evolution of the portfolio that we have. So there are significant growth drivers for us because, in essence, what we're doing is we're embracing the fact that our lives have gone digital. And we're looking to help our customers better resolve identities in an online marketplace and to minimize fraud in transactions but also to tailor marketing offers to the consumer. So there's a lot there from a product perspective that cuts across many of the verticals that we go to market in, right? And there's a lot to be excited with TransUnion's verticals. Financial Services has clearly been the core of our business for a long time. But as Chris already said, we've branched out into other verticals like insurance, for example, and the public sector, government, tenant and employment, media that are really nice complementary aspects to our business that are growth drivers for us. And then finally, there is our International portfolio, which is very strong. We have great positions in India that continues to grow significantly great market dynamics there with an emerging middle class but also positions in the U.K., Latin America and Canada as well, too.

Yes. And I think if you double-click down on FS, which has been particularly robust in the U.S., mortgage doubled during the pandemic era more or less and is now coming back toward the long-term trend line. Consumer lending has been an outsized grower for us, particularly given our strong position in fintech. Card originations and card balances have posted really nice growth. And auto has been banging along with some decent growth at near peak levels of production for multiple years now. And the biggest issue there is consumers want to spend more on autos than they can gain access because of supply chain concerns. And that's led to the used car market getting bid up a lot. That helps us a bit because more credit cards -- rather more credit reports are pulled on used car transactions than new car transactions as consumers shop to get optimal financing. So those are kind of the dynamics within that particular vertical.

Perfect. Across that answer and I realized, Todd, I gave you the largest question that I possibly could, but maybe you hit on a bunch of different opportunities. I want to see how many we can get through here. But maybe to start I think what's very much a kind of front of mind for most investors is the flurry of activity here on the M&A side over the past 6 to 9 months. So could we start with Neustar? It's a large deal. It's transformational in many ways. Can you talk about kind of the enterprise strategy around bringing in Neustar and what you expect it to be able to grow but also unlock within the broader TransUnion portfolio?

Happy to. So before we talk about particular companies that we bought, let's just talk about the categories of service that TransUnion participates in. I started by explaining the basics of credit reporting and how that information is used to assess risk and determine which consumers you want to do business with, right? So it's, at the core, in the essence of marketing activities, in developing the audience that you want to target and acquire, right? And we've talked about the more kind of market-sensitive portions of our portfolio, which would be marketing batch services, right? So the point is, as a credit reporting agency, we have participated in the marketing value chain, right, the process of acquiring new customers for a long time. And the nature of products and services continued to extend, right? So the core service is pretty clear. A lender comes and expresses an interest in a certain segment that has certain characteristics that fit their profile, we can produce that. Over time, we started to add services that would actually help the lender go and get those services. With the acquisition of Neustar, we got a platform and a series of marketing capabilities that allow us to extend across the full spectrum of client marketing and customer acquisition processes and measurement effectiveness, if you will. So we think of that as really formalizing the full range of services that we offer in marketing that is entirely complementary to the core credit reporting and credit access that we've offered traditionally. The other thing that was clear over time is that the credit database is broad and accurate and authoritative. And from the beginning, it was used to identify and authenticate consumers off-line as a type of fraud mitigation, right? And over time, we added capabilities to assist with consumer identification and authentication online. And Todd talked about the digitalization of economies and all of that, and increasingly, commercial transactions are digital. And so we began investing in digitally-based fraud mitigation capabilities, largely around device reputations and device behavior during e-commerce transactions. So a good portion of what we acquired with Neustar is exactly those types of capabilities and data sets that contribute to that. Now in the case of marketing, which is 1 of 3 lines of business within Neustar, they were more developed. And so the combination, we think, creates a real complete service offering, with Neustar in the lead. On the fraud side, that will be consolidated into our fraud offerings over time. And then we also gained entry into the communication space, where they have the most authoritative database of phone numbers, how they're used, how they change, when they're engaged, et cetera. And from that, you can use that information both to authenticate consumers to figure out the best time to reach them for marketing or collections or other efforts and also a variety of call center fraud mitigation solutions that they've created. So now with that, we can go to a large customer and say, hey, we can protect you from fraud in the e-commerce domain and also in the call center, right? And fraudsters attack on both vectors, if you will, -- and so it's important, I think, to work with providers that can provide coverage but also can show you when it's the same players attacking in different ways. And I think we'll be uniquely positioned to do that. Plus, I think we got some great underlying technology. They've got a platform that is very good at ingesting data and appending and arranging that data around a consumer profile. The term is an industry graph, but essentially, it's a consumer profile. And they can arrange this massive information around the individual consumer, around individual devices and device families, which are interrelated because we all have multiple devices or many of us do and geolocations, right? And so that will become, over time, a point of consolidation for all of the expanses of data that TransUnion has as well as all of our identity graphs that underpin a variety of products across the business.

No, it's really interesting. Obviously, it seems like a huge opportunity, not only to enter new markets but also kind of leverage technology into assets that you already have, obviously, a wide variety of data assets that you've accumulated over the years. So that's helpful context.

So that's the Neustar transaction, which, as you pointed out, was our largest transaction ever and a large one and certainly transformational, and it's going well. And we feel like we're integrating, and things are on track. Direct-to-consumer is also a big part of our portfolio. Our product line is anchored by credit education and enablement services that consumers subscribe to. We also provide that content and those analytics indirectly to third parties that want to engage consumers with that offering. What we've been missing though is a full-featured consumer identity protection offering. And so we acquired Sontiq. It was roughly $85 million top line, high 30s in EBITDA last year, really nice growth and just directly complementary. And look, that's -- the revenue synergies are working out well there as expected. And the fact that we have now both product lines brought together has allowed us to compete for business that previously we wouldn't have been able to. So that's worked quite well. And then by acquiring the Verisk Financial Services division with its principal asset, Argus, which is a unique contributory database of credit card transactional information, it gives us an additional level of depth underpinning our U.S. and other markets' credit database, where for card issuers, you can not only see all the consumers that have a card and the balances and the revolving and all of that, but you can actually double-click down and see the composition of their spending. And that's important for risk assessment but really market understanding and targeting purposes, right, because from that data, we can abstract at a ZIP+4 level the characteristics of consumers based on their spend, and then card marketers can use that for their marketing efforts and then determine whether those marketing efforts were actually successful. Did they change consumption behavior? Did they succeed in acquiring a new customer of the demographic and the credit profile that they were looking for?

Yes. So 3 deals in a short time frame. You now have a business that's evolved, certainly from where it was in '08, '09, continues to, in my opinion, get more resilient to kind of the economic cycle. But I think since it is very topical right now, could you spend some time talking about kind of the resilience of the model, economic sensitivity as a whole, just with kind of the new TU post transactions?

Sure. Post transactions and just the kind of the organic development that we've done. So the last big downturn, 2008, the Great Recession, I mean, independent of the pandemic shock, right? And Todd was there. What did revenues drop in '09?

Well, revenues dropped about 10% from peak to trough. At that point in time, company was heavily dependent on U.S. Markets, Financial Services. So what was an imperative at that point in time was to diversify the business into adjacent markets so to not be as dependent on the U.S. So what I -- to my earlier response, many of the vertical markets that I spoke to, like Insurance as one good example, we, in essence, stood up at that point in time to diversify the portfolio. So we've been on that focus for the last 12 years or so.

Yes. So like the first vector would just be geographic, if you compare. And so now we're operating across 30 markets, and you get some element of geographic-based diversification, and then we've got the subverticals within each of those markets. So when consumer lending gets chilly, insurance is steady, government is on a rapid growth trajectory, et cetera, et cetera. And then there's a lot of solution line stuff. I mean back in the period Todd's talking about, we truly were a credit reporting agency that was probably 90% of our revenues plus around the world and even more concentrated in the U.S. So we really were driven by the consumer lending activities in the market. Now fraud is just on a kind of independent growth vector. We're in marketing optimization, where we're positioned to gain a lot of share and grow. We've got public records-based investigative solutions. In short, a lot of solutions diversification over this period into areas that are not as cyclical. But net-net, we're bigger. And we're also much better positioned to thrive in a downturn.

Absolutely. Can we talk about some of those that might be more resilient? I think, Insurance, you've mentioned a couple of times. It's continued to deliver double-digit growth as it has gotten bigger and bigger. How big is that business today? And what could drive the next few years of kind of outsized growth in that business, in particular?

Well, several hundred million dollars.

Yes, a little bit over $200 million in the Insurance business.

Last year?

Last year, 2021.

And focused on geographic expansion and also focused on continuing to acquire incremental data assets that are useful to carriers in making decisions about who they underwrite for auto and property and even life insurance. We're now spread across those different product lines. A big opportunity to bring Neustar marketing services to our Insurance customers. In fact, Neustar has 1 or 2 top 20 carriers that use their services deeply, right? And these are kind of 8-figure type of relationships. And our Insurance team has just been blown away by the capabilities there and are excited to take it across the full spectrum of insurers that we cover. So diffusing the marketing solutions, continuing fraud mitigation, growth within those carriers and beefing up the data assets to support core underwriting, that's the mission in the Insurance segment.

And then -- we have a couple of more minutes here. I want to make sure we touch on International briefly. You mentioned it as a point of diversification earlier. But really, India has been a home run for many years in a row. Can you talk about what's been so successful in that market, the products that have led the exceptional growth over the past several years and what the kind of runway for growth looks like there?

Yes. I'm going to let Todd talk about that because he's been on the ground in all these international markets, particularly in his former roles, and very familiar with our growth in India.

Yes. Thank you. I'm happy to answer that question. So yes, as I alluded to earlier, we have an amazing business in India. It was something that we started -- it was a business we started with the major Indian banks in the early 2000s and partnered with them over probably about a good 10 years. And then ultimately, in 2014, we acquired majority stake of the business. Today, we own over 90% of the business. What's truly amazing to me about the business in India is, for a business that's only about 20 years old, just the level of products and the sophistication that we've been able to bring to that market. So in essence, we're able to help our customers. As they see problems in their business, we're able to bring solutions to them proactively. So it's given us a tremendous first mover advantage in the market that we've been able to maintain because so much of the product innovation that we've had success with in the U.S. and other geographies, we've been able to deploy. So products like CreditVision, our trended data product, has been a big success in that market as well as our fraud capabilities. And just early on in the businesses' beginning had a tremendous amount of success with decisioning and analytic capabilities as well too. So it's just the depth of sophistication to help solve many of the customers' challenges. And we've also brought our vertical market approach there as well. So they have a nice growing insurance business as well as direct-to-consumer. And different to what we have in the U.S., they have a really nice commercial database as well too that's growing quite well. So a lot to be excited about in the India business for us.

Yes. And look, that's the mission. I mean, obviously, India, a rapidly developing market, huge population, credit penetration increasing rapidly. We have to take full advantage of that opportunity. And we're doing it, like Todd said, with this full range of products. But we also want to use that privilege perch we've got, servicing consumer lenders to also serve them on the commercial side and really look at the information landscape more broadly and occupy more space than we would in a lot of our other markets because it's more open there. And again, we've got a great brand and an awesome team.

Great. A lot of opportunities we didn't get to. Hopefully, we can get to them in the breakout. But thanks, everyone, for joining, and thanks to the team for joining me on the stage here today.

Yes. Thanks.

You're welcome.